Workbook

Where to Start

Let's Talk Money

You'll want to know how much you can spend.

Start off with pulling your credit report and checking for any mistakes.

Next you’ll want to find a good loan officer. A great lender can make a deal seamless. A bad lender can make for a painful experience. Ask for referrals and be sure your loan officer has experiance and excellent customer reviews or testimonials. Be sure to ask why they liked working with the lender when receiving recommendations. Kaitlin has several great lenders she would be happy to share.

Pre-Approve I Pre-Qualify

Your lender will do one of two things to access how much you can spend on a property: pre-qualify or pre-approve.

Pre-qualification is a best-guess based on your credit profile, stated income and debt levels. Basing your search criteria on this can be complicated, particularly if you are self-employed or receive a 1099 instead of a W-2 for taxes.

Pre-approval is an actual letter of verification based on your financial documentation that states you are pre-approved for a loan of a certain amount. Including this letter with your offer makes it a stronger offer and is necessary in competitive markets.

documentation

Be prepared and gather some of the documentation you’ll probably need:

A few months of recent pay stubs

2-3 years of tax returns

Copies of 2-3 months of statements from bank and investment acounts

Documentation on any large or unusual deposits or gifts

ITS IMPORTANT NOT TO TAKE OUT NEW CREDIT (BUY OR LEASE A CAR, NEW CREDIT CARD, MAX OUT YOUR CREDIT CARD, ETC) OR GO FROM EMPLOYEE TO SELF EMPLOYED, FREE LANCE OR INDEPENDENT CONTRACTORUNTIL YOU HAVE CLOSED ON YOUR HOME.

MOST POPULAR TYPES OF LOANS

Your lender will go into the most up-to-date options that are geared to your specific profile. Typical loan options include:

Conventional: this is the most "vanilla" of all mortgages - it’s the standard and what most people are thinking of when talking about mortgages. This accounts for about 70% of all mortgages. These generally have down payments of 5-20% - possibly as low as 3% for first time buyers or as high as 25% for investors. Freddie Mac and Fannie Mae back these loans. Any changes in their policies impact how lenders are able to provide loans. Credit score standards on conventional loans can be quite high. Debt-to-income ratios typically max out at around 40% for these loans.

FHA: this became a very popular option during the recession when low down payment options for conventional financing was less common. FHA has a 3.5% minimum down payment option as well as increased options for those with less-than-stellar credit. It may offer higher debt-to-income ratios based on credit score. FHA premiums, similar in concept to PMI, are for the life of the loan and cannot be removed.

VA: US vets have the additional option of VA loans. These offer 0% down payment options. Talk to your lender about this option if you have service experience.

Jumbo: Conventional loans come with a price cap of $453,000 in 2018 for most areas. This number is adjusted periodically. Any mortgage amounts above that are called jumbo loans. Sometimes a first conventional loan of the maximum conventional limit is secured and a second non-conventional loan is originated to faciliate home purchase over that amount.

housing payment

Your total housing payment will include: Principal (amount you're paying back on the loan balance), Interest (the cost of borrowing money), Taxes (property taxes - in Austin 2.46% is typical), and Insurance (ask an insurance agent). If you put less than 20% down, you will have Mortgage Insurance (there's a few exceptions).

To get your Principal & Interest Payment, use this Mortgage Calculator

Lending Terms

Getting a mortgage comes with a new language. Here's a quick reference for new vocab terms.

Principal: the total loan amount

Interest rate: how much it costs to borrow money

Fixed and Adjustable rate: fixed rate means the interest rate stays the same for the life of the loan. Adjustable rate loans start off lower than fixed rate and increase over time; they adjust to where market rates are plus a few percentage points. Specifics vary, be sure to understand what you’re getting and what the max rate and payment.

Down payment: how much money put down on the home, it’s the buyer’s “skin in the game”. The gold-standard is 20% and there are options as low as 5% for many buyers. Investors are usually required to put down 20-25%.

Private Mortgage Insurance: a fee for putting less than 20% down. It is paid until the home hits the equivant equity position in the home of having put 20% down. This ranges from about $100-300 per month depending on the buyer’s profile and lender. Many have a 2 year minimum, others do not, some will only allow it to be removed before 2 years if the home has been remodeled.

Amoritization Term: the amount of time it will take to repay the loan. Typically this is 30 or 15 years. 15 year mortgages come with lower interst rates and higher monthly payments.

Principal & interst (P&I) payment: the portion of your monthly payment that repays the mortgage. At first, most of your payment goes toward paying interest. As time goes on, more of your payment will go toward paying off the principal balance

Escrow payment: many banks take monthly payments to go toward your taxes and insurance each year. This ensures that at the end of the year, you’ll have that large sum of money in the bank and won’t need to come up with several hundred dollars for insurance and several thousand for taxes.

Homestead Exemption: after you’ve lived in the house on Jan 1, you may apply for a homestead exemption. It caps the increase on your property taxes to a max of 10% each year.

The days of creative financing are mostly a thing of the past after the financial crisis in the late 2000’s. You may still hear of balloon payments, interest only, wrap arounds, etc. If you are considering these options, be sure to fully understand what you're signing up for. Consider consulting an attorney.

Home Search

The home search part of the process can be the most fun and can be a bit of an emotional rollercoaster for some home buyers.

Here are a few tips to help the process run smoothly.

Want or need?

It's helpful to have a clear understanding of what you want and what you need in your home. Sometimes that line can blur. Kaitlin will talk through and help you get clarity on where you stand. Sometimes being in a property can help clarify.

Expectations

Good deals are fun to find. Realistic expectations are important to have. A great agent can help you find what you're looking for if it exists but they're not performing actual magic.

Market Conditions

It's important to understand the market climate you'll be participating in. Is it hot, hot, hot? If so, you won't have time to sit and think. If you find something you like, you'll have to jump now or risk loosing it to one of the other 2, 5, or 20 buyers in line. Is the market moving sluggish? If so, you may have more time to think. You maybe able to negotiate a great price. Even in the same physical location, the market can vary by price point. It depends on how many buyers are looking and how many homes there are to sell.

Property Condition

Understanding what is involved with making improvements to a home and how much they'll cost, and what you're willing to take on are important in the search process, especially in locations with an abundance of older homes. It is important to mention that labor costs vary city to city. For example, a $2,000 paint job in one city might cost $3,500 in another. Again, this comes back to supply and demand. How many people are in the labor market for a specific type of work compared to how many people are wanting a service performed. Kaitlin and her clients have done a wide array of repairs and updates. She can shed some light onto cost and experience of some of them. Shopping around for quotes can save you substantially. The lowest quotes is not necessarily always the best. Do your homework, read reviews, etc.

Searching for Homes Online

Take Notes

After you've seen a few homes, they can all start running together in your mind. It can be helpful to keep a log running of likes and dislikes while visiting properties. Scoring on a 1-10 scale can help too.

Making an Offer

Once you've found a property you would like, the next step is to make an offer to purchase it.

Here are a few of the key terms:

Price

Down Payment

Close Date

Earnest Money

Option Fee

Option Period Length

Home Warranty

Financing

Take a look a the contract by clicking the button below. Condos use a different contract. Ask Kaitlin for a copy of the Condo Contract.

Price

Talk to Kaitlin about the best strategy for offering price. The competitive environment and market conditions will impact how aggressive to be on price - this is true when talking about offering more or less than asking price.

Down Payment

In a highly competitive market, sellers may care about how much you are putting down.

Close Date

30 days is still the standard. Some larger banks may take longer, hovering around 45 days. Many high-quality smaller shops are still able to hit a 30 day or quicker close. This is preferable to most sellers. Cash transaction typically close in 14 days. If Title is already open, this maybe shorter.

Earnest Money

This is held by the title company and is applied to your cash to close. If you choose not to buy a home after the option period is up or are unable to attain financing after the financing period, the seller will receive these funds.

Option Period

The option period is the time set aside for buyers to inspect the home and get any quotes they would like. They may walkaway and decide not to buy during this period for any reason and receive their earnest money back. They will be out the Option Fee and any funds spent on inspections.

Option Fee. This is the amount paid to the seller for taking the home off the market and allowing the buyers to inspect. The amount is negotiable and usually determined by the market. It usually varies from $150 in a slow market to $500+ (or none) in highly competitive markets.Option Period Length. 5-10 days is typical. Expect to pay a higher fee for longer. In highly competitive markets, can be 1-3 days. Buyers have the ability to waive the option period. This is usually only done in extremely competitive multiple offer situations.

Financing

Most of the information you'll need to know about financing is in the section above.

In the financing addendum, it will specify the type of financing, the terms, and how long you have to secure the financing. Generally, 21 days is the longest most sellers like to see. This is usually enough time for the lender to do their due diligence and appraisal. Talk to your lender before signing the contract to ensure they will be able to hit this timeline.

Home Warranty

Many sellers agree to a one year home warranty. This is usually valued between $400-800 and covers most items that break as a normal part of home ownership - water heater, a/c, etc. Be sure to read the policy carefully for exclusions and details.

Lease Back

Some times sellers will request a lease back. This means that after you close on the home, the seller will continue to live there for a few weeks. Some buyers feel there is extra libility here. Sellers generally tend to care for the home as they have while they owned it. It is extremely rare to have a buyer lease before closing, although it is possible. This comes with extra liability that something last minute could go wrong with the buyers financing, for example.

Option Period

Accepted

Congratulations! Your offer was accepted.

Checks

Within 2 days of an executed contract that everyone has signed off on and received, you will provide the Title Company with the Option Fee and Earnest Money. These are usually personal checks, although some sellers may take alternative payment (paypal, venmo, etc.). Some buyers opt to use money orders or certified checks if they don't have personal checks. If this is you, plan ahead as there's an extra step of going to the bank to get these.

Inspections

While you are negotiating or putting in an offer, it often makes sense to reach out to an inspector to see if they have openings during your option period.

General Inspection

Ask Kaitlin for inspector recommendations. Although Kaitlin is happy to provide recommendations, she (and all agents and brokers) do not require you to use a specific inspector. Be sure to ask about your inspector's experience inspecting homes and their professional experience prior before they became a home inspector. Understand what is covered and and what is not on a home inspection. Ask the inspector what their availbility is like to answer questions. Kaitlin highly encourages her clients to meet with the inspector after they have finished the inspection. The inspector should walk through the home with the buyer and talk though noteworthy items on the report.

Additional Inspections

HVAC

Structural Engineer

Mold

Plumbing - Static Test & Camera Scoping

Well or septic

Kaitlin recommends setting aside $1500 for inspections. It is best to understand as fully as possible what you're walking into as a buyer.

Mortgage Underwriting

Now that you're under contract and out of option period, the lender will underwrite the loan. They may ask for updated documents, re-run your credit, do an employment check, etc. This is why it's important not to change your credit profile (new credit, max out cards, etc.) after you start talking with the lender until you close.

Appraisal

The lender will also order an appraisal. An appraisal is an independent review of the value of the home on the bank's behalf. The lender wants to ensure the property they're lending on is worth at least as much as the buyer is buying it for. A mortgage is a collateralized loan. Meaning that if the buyer doesn't pay, the bank will repossess the property through foreclosure and then sell it to recoup their loss. They want to make sure if they have to do this, they can get their money back.

When looking for a lender, ask them how they order appraisals. If they have their own pool or use Appraisal Management Companies. And how long apprasials are taking right now. Sometimes they get backed up and it slows the lending process down. Sometimes inexperienced appraisers in a paticular area will not have the neuanced information they need.

Title

While the bank is underwriting the mortgage, the title company is checking the title history of the property to be sure it is free and clear to sell.

They will work with the bank to get all the lending as well as the transfer of ownership paperwork together.

Closing Disclosure

3 days before closing, you'll receive the breakdown of all fees and costs. You'll know how much money you'll need to bring to closing and can wire it.

***It is very important to verify any wiring instructions directly with the title company. There are scams that will ask you to wire money.***

Closing

You'll meet with the title officer and sign everything. It should take about an hour. Your lender and agent may join you.

After you and the seller have signed everything, the lender's attorneys will review documents and then the lender will begin funding by transferring money to the title company. Once it has "funded", it is officially yours. Unless you have a seller leaseback, you should receive the keys to the property after funding.